What today seems to most people a matter of survival could turn into a major opportunity for the members of the Gulf Cooperation Council (GCC), Saudi Arabia, Bahrain, the United Arab Emirates, Kuwait, Oman and Qatar. We are referring to the need of these countries—all heavily dependent on oil export revenues—to diversify their oil-based economic and social structure (except for Qatar) and, with it, the underpinning of their energy sector. The collapse of crude oil prices in late 2014 and the enduring uncertainty and volatility of the oil markets, resulting in OPEC’s inability to respond to the changes under way, are nothing short of an existential challenge for the GCC member states. The developments of the last five years have made it necessary for the Gulf’s ruling regimes to embark on serious reform efforts aimed at reducing their reliance on oil revenues for their economic activities and for securing domestic political and social stability. In the three-year period from the end of 2014, financial revenues from oil exports dropped by USD 400 billion, while in 2016, after recording average surpluses of 10 percent of GDP for more than ten years, the six GCC member countries ran an aggregate deficit of around 12 percent. Macroeconomic performance obviously varies from country to country, based on the weight of oil on the national economy. In Kuwait, for example, the budget declined by about 30 percent of GDP, compared to 15 percent in Saudi Arabia, while in more virtuous cases like the United Arab Emirates there has been successful damage limitation and the deficit has been contained to just 2.1 percent—but the trend seems to be unstoppable. In conjunction with falling financial revenues, GCC countries have also experienced a considerable slowdown in economic growth rates, rising unemployment, falling wages, and declining per capita consumer spending.
Rethinking the Role of Oil
The substantial financial reserves built up in the sovereign wealth funds of Gulf economies have so far enabled the various rulers in the region to cushion the effects of turbulent times and compensate for substantial public deficits. But they cannot provide a definitive solution to the problem. The role of oil in the political, economic and social life of these countries requires rethinking. The current rebound in oil prices and concomitant increase in revenues is the only factor with the potential to secure these countries’ economic recovery. This effectively ensures that the Gulf economies will remain entangled in their current predicament. While in the medium-term it is absolutely vital to reduce the weight of the oil sector on these countries’ economies, in the short-term a wise and virtuous domestic management of these resources is crucial. The intensive and inefficient use of crude oil and derivatives at home significantly limits these countries’ ability to maximize exports and the financial revenue that springs from them. Over the last twenty years, energy consumption levels in the Gulf have rocketed, and between 2000 and 2014, the GCC recorded the world’s largest increase in energy demand, second only to China’s. Saudi Arabia and Kuwait, for example, consume almost one third of their vast oil production, while in Oman, domestic demand consumes almost the entire national output, and Bahrain actually needs to import oil from its neighbor Saudi Arabia. The only country that remains essentially unaffected by these patterns is Qatar, most of whose oil output is for export since its economic development relies mainly on natural gas. Given the current demographic trends, increasing levels of electrification and rates of economic growth once these economies have recovered, domestic energy consumption seems set to expand even further, with the transport and power generation sectors in the spotlight when it comes to oil demand. But while to some extent the auto sector is at the heart of consumption of oil and derivatives—all the more so in countries where gasoline prices are heavily subsidized, as is the case in GCC countries—the electricity sector’s level of dependence is an anomaly and a problem entirely peculiar to the Gulf region. To give an idea of its scale, 40 percent of the GCC countries’ electricity generation capacity comes from crude oil, diesel and heavy fuel oil, mainly accounted for by Saudi Arabia (75 percent of national electricity generation) and Kuwait (65 percent), with a much lower contribution by the UAE. These staggering figures signal the need for local governments to abandon this economic model in order to rapidly monetize the value of these resources, especially in view of the fact that the oil market is bound to become more uncertain and less profitable in the long term.
Stepping up on Gas
Side by side with the need to monetize the exploitation of oil resources, GCC countries need to promote their natural gas reserves, which are abundant in the region, albeit less so than crude oil. The central importance of oil in the Gulf region often relegates the area’s gas potential to a secondary role. Yet, the six GCC countries hold some 42 trillion cubic meters (tcm) of gas, accounting for 22 percent of the total reserves discovered globally, while their annual production is around 410 billion cubic meters–almost a third of which are in Qatar, accounting for a “mere” 11 percent of total output. Qatar is the undisputed regional leader in this sector with estimated gas reserves of 25 tcm, the world’s third largest after Russia and Iran, and an annual production of 123 bcm, most of which is exported. The remaining GCC countries, besides very low production rates compared to their potential, have virtually no gas export strategy. Saudi Arabia, the second largest producer, uses all of the 84 bcm of gas produced from its fields to supply the domestic market, as do Kuwait and Bahrain. The United Arab Emirates, with an annual production of 81 bcm, are net gas importers despite selling small amounts (5 bcm annually) on the LNG markets, while Oman, also via LNG, exports 10 bcm per year, accounting for around one third of its national output.
In the context of energy transition, these resources can play a key role both regionally and globally. Natural gas, due to its lower CO2 intensity compared to oil and coal, is universally recognized as the ‘bridge’ fossil fuel for economies to achieve complete decarbonization in the decades to come and meet the pressing challenges of climate change. By focusing immediately and decisively on developing their gas resources, GCC countries can achieve three key goals, spread over different timescales. First, it allows them to free up oil resources used inefficiently at home (especially in power generation activities), and thereby maximize export earnings before further volatility and uncertainty hit the crude oil markets. Second, it secures the strategic positioning of GCC countries on the gas markets, which are set to grow exponentially–especially in Asia–as a result of global decarbonization policies. Thirdly, it ensures an economically and environmentally sustainable domestic transition in line with the goals of reducing global greenhouse emissions set by the Paris Agreement. With this in mind, institutional players and the private sector seem more inclined than ever to grasp the intrinsic opportunities offered by the gas sector. And while the choice made by Qatar—the leading global LNG producer—to leave OPEC in order to focus on gas production and distribution seems inevitable, the announcement by Saudi Aramco (Saudi Arabia's state oil company and world's largest oil producing company) to invest massively in gas could not go unnoticed. On the one hand, Saudi Arabia’s energy minister Amin Nasser has launched the regime’s strategy to increase the share of gas in the energy mix from 50 to 70 percent thanks to new domestic production. On the other, the Saudi giant has decided to invest USD 160 billion in the development of conventional and non-conventional fields in the country so as to be able to tap into the growing demand for gas from China and India. Kuwait is also moving in this direction. Firstly, it plans to increase external gas supplies through the LNG terminals at Mina al-Ahmadi and al-Zour, in order to reduce the share of oil in its electricity sector. It is also boosting investments in the country’s upstream sector with a view to reaching a production of 11 bcm per annum by 2023. Finally, the United Arab Emirates, in partnership with Eni and Wintershall, is planning to develop a giant upstream project in the Hail, Ghasha and Dalma fields, with the capacity, once in full production, to meet 20 percent of its domestic demand.
Learning from the Past while looking to the Future
The exploitation of the region’s huge natural gas potential should not distract GCC governments from their countries’ priorities, which are to ensure an economically, socially and environmentally secure and sustainable transition. In this respect, investments in gas must be seen as the first step in a region-wide diversification strategy and not as a shift towards a new form of dependence from energy resources through the gradual replacement of crude oil with natural gas. To this end, the development of gas reserves needs to be accompanied by concrete efforts to promote new energy measures ranging from penetration of renewables to energy efficiency policies and the phase-out of subsidies. GCC governments made such efforts in the aftermath of the collapse of oil prices, but they have been slackening since the oil markets started to recover, albeit slowly. Saudi Arabia, for instance, plans to develop 30 solar and wind projects with an installed capacity of about 9.5 GW by 2023, in the framework of the 2023 Vision strategic plan. The Arab Emirates have launched their own initiative aimed at achieving a 50 percent contribution of renewables to total energy consumption and reducing the carbon footprint of power generation. These are ambitious plans which, thanks to technological evolution on the one hand, and to the region’s meteorological/climatic conditions on the other, could enable these countries to achieve truly outstanding results. Through the combination of abundant natural gas resources and the huge potential for renewables in the region, GCC countries have the opportunity to tear down once and for all the (oil) dependence models that have hindered and continue to hinder their economic and sociopolitical development. Although the implementation of these strategies is bound to meet with strong resistance seeking to maintain the existing order, at least until the point of no return, the first steps taken by the regional players in the gas sector nevertheless offer some hope that a secure, fair and sustainable transition can be achieved across the whole region.
The Author: Nicolò Sartori
Nicolò Sartori is a Senior Fellow and the Head of the Energy Program at the Istituto Affari Internazionali (IAI) in Rome. He is mainly focused on the European Union’s energy policy and on issues of energy security and specifically on Italian and European external energy policy. He has also worked as faculty advisor at the NATO Defense College in Rome where he carried out research projects on the role of the Atlantic Alliance regarding energy security.